STANDARD COSTING

A standard cost for a product or service is a working conditions. Purposes are to: predetermined (planned) unit cost set under specified provide control by exception reporting form a basis for performance management value inventories simplify accounting

There is a whole range of bases upon which standards may be set within a standard costing system. Attainable standards based upon efficient (but not perfect) operating conditions. Includes realistic allowances for material losses, machine breakdowns, etc. Achievable high performance set, but has to be worked for it. Basic standards long-term standards which remain unchanged over a period of years. Sole use to show trends of material prices, labour rates & efficiency, etc. Cannot be used to determine current efficiency. Least used and least useful. Current standards based on current working conditions. The disadvantage is that they do not attempt to improve upon current conditions. Ideal standards based on perfect operating conditions, i.e. no wastage, no breakdowns, no idle time. Japanese companies use this to pinpoint areas where cost savings may occur. May have adverse motivational impact.
BPP EXM KIT Q 29 (a)

CALCULATING VARIANCES AND REASONS FOR VARIANCE: Sales price variance: Actual quantity sold X Actual price per unit Actual quantity sold X Budget price per unit

Causes of variance: Higher (A) or lower (F) discounts than expected offered to customers A greater (F) or lesser (A) proportion of higher priced products sold than expected More (A) or less (F) price competition from competitors Sales volume variance:

Actual quantity sold X Standard margin Budget quantity sold X Standard margin

margin = contribution (marginal costing) or profit (absorption costing) per unit. If no method mentioned in the question to follow then use profit as margin

Causes of variance: Changes in customers buying habits Successful (F) or unsuccessful (A) marketing campaigns Higher demand as a result of price cuts (F) or vice versa (A) Material price variance: Actual quantity bought X Actual price Actual quantity bought X Standard price

Causes of variance: Wrong budgeting Higher (A) / lower (F) price than expected paid, may be because of new supplier Higher (A) / lower (F) quality of material used Careful (F) / careless (A) budgeting Losing (A) / gaining (F) bulk discounts by buying smaller / larger quantities Change of supplier (F) Material usage variance: Actual output should use X Standard price Actual output did use X Standard price

Causes of variance: Wrong budgeting Higher (F) / lower (A) quality of material used Higher (F) / lower (A) grade of worker Stricter quality control (A)

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STANDARD COSTING
Theft (A) Change in product specification The material usage variance can be subdivided into material mix variance and material yield variance when more than one material is used in the product. A mix variance and yield variance are only appropriate where proportions of materials in a mix are changeable and controllable and where the usage variance of individual materials is of limited value because of the variability of the mix. A mix variance occurs when the materials are not mixed or blended in standard proportions and it is a measure of whether the actual mix is cheaper or more expensive than the standard mix. Actual quantity at actual mix X Standard price Actual quantity at standard mix X Standard price Causes of variance: Higher (F) proportion of a cheaper material is being used hence reducing the overall average cost per unit, but risk to loose quality A yield variance arises because there is a difference between what the input should have been for the output achieved and actual input. Actual quantity at standard mix X Standard price Standard quantity at standard mix X Standard price Causes of variance: Favourable variance could happen due to better operational efficiency or a change in the mix of ingredients Adverse variance could result from increased spillage or wastage or from poor quality ingredients Mix variance + Yield variance = Usage variance Usage variance + Price variance = Total variance Variable overhead / Labour expenditure / rate variance:

Actual hours for actual activity X Actual rate Actual hours for actual activity X Standard rate
Causes of variance: Wrong budgeting Employees were paid more (high-skilled labour) (A) / less (low-skilled labour) (F) than expected Variable overhead / Labour efficiency variance:

Actual hours for actual activity X Standard rate Standard hours for actual activity X Standard rate
Causes of variance: Wrong budgeting More (A) / less (F) hours worked than anticipated Higher (F) / lower (A) grade worker Higher (A) / Lower (F) than anticipated labour turnover, resulting in more (A) / less (F) time spent on training than budgeted Higher or poor quality (A) / lower or better quality (F) of material to work with More (F) / less (A) efficient working through motivation Machine breakdown (A)

Idle time variance: Actual idle time X Standard rate Standard idle time X Standard rate
Causes of variance: Machine breakdown (A)

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STANDARD COSTING
Efficient working condition (F)

Fixed overhead total / cost variance (in absorption costing): Actual expenditure Fixed overhead absorbed Over-absorption Under-absorption

XX (XX) (X) (F) X (A)

Fixed overhead absorbed = Absorption rate X Standard hours per unit (based on standard units) Absorption rate = Budgeted overhead / Budgeted activity (hours)

Fixed overhead expenditure variance: Actual expenditure Budgeted expenditure

Causes of variance: Changes in price relating to fixed overhead items Seasonal effect Rate of inflation different than during budget Poor budget planning Cost savings plan achieved (F)

XX XX

Fixed overhead volume variance: Budgeted expenditure Standard hours for actual output X Absorption rate

1X 3X 2X (F)

Causes of variance: Changes in production volume due to change in demand or alterations to stockholding policy Changes in productivity of labour or machinery Production loss through strikes
BPP EXM KIT Q: 28 (b)

Fixed overhead capacity variance: Budgeted hours X Absorption rate Actual hours X Absorption rate
Causes of variance:

1X 3X 2X (F)

Hours worked different from budgeted, more (A) / less (F) Lack of (A) / more (F) demand for the product Change in productivity Hours lost due to strikes, overtime (A)
Standard hours for actual output X Absorption rate

Fixed overhead efficiency variance: Actual hours worked X Absorption rate

Causes of variance: Same as for labour and/or variable overhead efficiency The sum of fixed overhead capacity variance and fixed overhead efficiency variance is equal to the fixed overhead volume variance. Reconciliation of Fixed Overhead Variances: Expenditure variance X Efficiency variance X Capacity variance X Cost variance X

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STANDARD COSTING

Factors to consider when a variance should be investigated: The size of the variance:
o Fixed size of variance: Investigate all variances, say, over $5,000 o Fixed percentage rule: Investigate all variances, say, over 10% of budget Corrections costs versus benefits Ability to correct Past pattern Budget reliability $ XX XX F / (A) XX XX F / (A) XX A $ X X X X X X X X X X

Operating statement: under absorption costing Budgeted profit (original profit based on budgeted output) Sales volume profit variance Standard profit on actual sales Selling price variance Actual sales minus standard COS Cost variances: F $ Material price X / Material usage X / Labour rate X / Idle time X / Labour efficiency X / Variable o/h rate X / Variable o/h efficiency X / Fixed o/h expenditure X / Fixed o/h volume X / Total X Actual profit Operating statement: under marginal costing Budgeted contribution (original contribution based on budgeted output) Sales volume contribution variance Standard contribution on actual sales (= flexed budget contribution) Selling price variance Cost variances: Material price Material usage Labour rate Idle time Labour efficiency Variable o/h rate Variable o/h efficiency Actual contribution Budgeted fixed overheads: Production Non-production Fixed overhead variance: Production Non-production Actual profit F $ X X X X X X X X A $ X X X X X X X X $ XX XX F / (A) XX XX F / (A) XX

XX F / (A) XX

/ / / / / / / /

XX F / (A) XX (XX) (XX) XX F / (A) XX F / (A) XX

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STANDARD COSTING

Comparisons suffered from the time delay between setting the standard and the occurrence of the actual results. This means that the difference between standard and actual may arise partly due to an unrealistic budget and not solely due to operational factors. The budget may need to be revised. Original budget (ex-ante), (flexed) Planning variance Revised budget (ex-post), (flexed) Operating variance Actual Planning variances: Aims to update the original standards to reflect the change in conditions and environment. Often deemed to be uncontrollable. Management may not be held responsible. Operational variances: Deemed controllable. Management held responsible for operational variances. When should a budget be revised? A Change in one of the main materials An unexpected increase in the price of materials A change in working methods and procedures that alters the expected direct labour time for a product or service An unexpected change in the rate of pay to the workforce Total Quality Management TQM is the continuous improvement in quality, productivity and effectiveness through a management approach focusing on both process and the product. Fundamental features include: prevention of errors before they occur importance of total quality in the design of systems and products real participation of all employees commitment of senior management to the cause recognition of the vital role of customers and suppliers recognition of the need for continual change

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